DC Discusses at The Montgomery Summit: The future of Tech M&A in the European markets

"The most important KPI is no longer how fast can you grow, it is how good are you at preserving the revenue that you’ve generated"

"We are only at the first inning of what will be a very long and highly exciting AI game"

M&A market landscape…

The stock market correction last year combined with the uncertainty of the wider macroeconomic environment and the 'squeeze' in the debt markets let to reduced deal activity in Tech & Software - but less so than in other sectors. We are still seeing private equity willing to pay strategic premiums for highly profitable and cash generative businesses - a trend which continues in 2023. With many funds taking a cautious approach holding back on investing last year, there will be growing pressure to deploy capital later in 2023. 

Over the past year, technology investors have shifted their focus from the speed of growth as single most important KPI towards a more balanced set of KPIs focused on revenue retention, strong unit economics, and profitability – cash is king again. 

What’s next…

Whilst the global geopolitical situation impacts investment sentiment globally, this has also created opportunities for certain sub-sectors. We have seen a sharp increase in cyber criminality. As a result we have seen increased investment flowing into this sector, with enterprise grade cyber security defences becoming table stakes for small to medium sized businesses. Investors also continue to be excited about backing leaders in vertical software which are viewed to be better protected against any reduction in software budgets. Finally, 2023 is the year where investing in AI technology and capabilities has become the top priority for financial and strategic investors. The first quarter of this year saw high profile transactions at very high multiples, a trend which we believe will continue.

US Technology & Software investors looking to invest in Europe should not underestimate the idiosyncrasies of the European markets:

• Processes are different – In Europe there is a higher rate of conversion from non-binding offers to final bids and as such, processes tend to be narrower from the start. We have seen some US investors struggle to be included unless they can convince the sell-side of their deliverability. It is better to be more selective rather than develop a reputation of being a ‘tire kicker’
• The market is smaller – The European markets are smaller and more close-knit than the US – whether it be national or cross-border. A good advisor on the buy side can make all the difference with valuable process intelligence and advice on strategy and tactics to edge out the competition in process

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